Foreign debt in emerging Asia has soared from $300bn to $2.5 trillion over the last decade

By Ambrose Evans-Pritchard

5:00AM BST 29 Sep 2014

Morgan Stanley warned clients that local lenders in Asia have relied increasingly on the wholesale capital marketsPhoto: AP

Debt ratios in developing Asia have surpassed extremes seen just before the East Asian financialcrisis blew up in the late 1990s and companies have borrowed unprecedented sums in dollars, leaving the region highly vulnerable to US monetary tightening.

Morgan Stanley said foreign debt in emerging Asia has soared from $300bn to $2.5 trillion over the last decade, creating the risk of a currency shock as the dollar surges to a four-year high and threatens to smash through key technical resistance.

"High dollar liabilities do not bode well for emerging markets. In Asia (excluding Japan), the credit-to-GDP gap has reached levels higher than 1997," it said.

The US bank warned clients that local lenders in Asia have relied increasingly on the wholesale capital markets - a little like Northern Rock before 2007 - allowing them to expand credit faster than deposit growth. This leaves them exposed if liquidity dries up.

Asia's credit-to-GDP gap measures how far loan expansion has pulled ahead of the underlying trend growth of the economy. It peaked at 10pc in 1997. This time a flood of cheap money from Western central banks and the Chinese authorities has pushed it to 15pc, clear evidence of credit exhaustion as productivity stalls and the region's economic model looses steam.

The bank's currency team said the region could be hit on two fronts at once: a credit squeeze as rising US rates push up borrowing costs across the world, combined with an exchange rate squeeze on "short" dollar positions. The response to one complicates the other.

Morgan Stanley's technical analysts say the dollar is poised to break its thirty-year downtrend as the Fed turns hawkish. It expects the dollar index - a broad gauge of the dollar exchange rate -- to surge towards 92 by next year if it breaks through resistance at 87. Such a move would be comparable to the global dollar shock that caused such strains twenty years ago. The Asian Development Bank (ADB) warned last week that the area should brace for "tighter liquidity" and possible "capital outflows" as the US ends quantitative easing in October. "While the region’s bond markets have been calm in 2014, the risks are rising, including earlier than expected interest rate hikes by the Federal Reserve," it said. The Fed was buying $85bn of bonds each month as recently as January. A fall to zero amounts to a major shift in global financial dynamics even before rates rise. The ADB said in its Bond Monitor that emerging Asia issued a record $1.1 trillion of local currency bonds in the second quarter of 2014, pushing the total stock to $7.9 trillion. Most debt is at maturities below thee years, creating roll-over risk. This does not include $1.5 trillion of cross-border bank loans and over $1.2 trillion in foreign currency bonds on latest estimates, mostly in dollars and owed by companies. Local bond issuance over the last year has jumped by 36pc in Vietnam, and 32pc in Hong Kong. China accounts for the lion's share of outstanding bonds. China Railway alone accounts for $975bn in yuan debt, and China State Grid a further $415bn. The Bank for International Settlements devoted its latest quarterly report to mounting leverage and dollar debt in emerging markets, especially in Asia. It said cross-border loans to China had jumped by 49pc to $1 trillion in the year to March 2014. The BIS said ultra-easy money had led to a "ubiquitous quest for yield", driving "huge investment flows" into emerging markets. "In many jurisdictions, corporates have opted to lock in low global interest rates and to sharply increase their international debt issuance. This could be a source of powerful feedback loops in response to exchange rate and/or interest rate shocks," it said. "It all looks rather familiar. The dance continues until the music eventually stops. Markets will not be liquid when that liquidity is needed most. And yet the illusion of permanent liquidity is just as prevalent now as in the past," said Claudio Borio, the BIS's chief economist. In stark contrast to the late 1990s, Asian states have borrowed in their own currencies and have little foreign debt. Most have large reserves. However, the BIS fears the region may be vulnerable through different channels, this time via private dollar debt and extreme sensitivity to rising rates on local debt. Emerging markets have had time to adjust since the first "taper tantrum" in May-June last year when hints of Fed tightening triggered a sudden-stop in capital flows. Yet most continued to build up debt briskly afterwards, borrowing at record low rates averaging 1pc in real terms. The BIS is concerned that these rates could snap back suddenly. The Fed signalled at its latest meeting that its benchmark rate will rise more steeply next year than markets had expected, setting off jitters worldwide. The great question is whether "rates rage" will prove as fleeting as the taper tantrum.

The demonstrations on the streets of Hong Kong present China with its biggest political challenge since the pro-democracy movement was crushed in and around Tiananmen Square in 1989. The parallels between the demonstrations in Hong Kong now and those in Beijing, 25 years ago are eerie – and must be profoundly unsettling to the Communist party leadership.

Once again, the demonstrations are led by students demanding democratic reform. Once again, the central authorities have lost control – and risk facing a choice between repression and a humiliating climbdown. Once again, the ultimate question is the power and authority of the Communist party in Beijing.

The differences between Hong Kong in 2014 and Beijing in 1989 are also significant, however. In the intervening 25 years, China has become an immeasurably richer and more powerful country. The Chinese authorities will also be hoping that the current demonstrations in Hong Kong, which started under the banner of the “Occupy Central” movement, will have more in common with “Occupy Wall Street” – which fizzled out – than with the student movement in China in 1989. Finally, the authorities have more leeway than in 1989, if they choose to use it, because Hong Kong is not the capital of the country – it is a regional city, which enjoys a special status under the formula of “one country, two systems” that underpinned the handover from British to Chinese rule.Under that formula, Hong Kong continues to enjoy a free press and an independent judiciary – freedoms that do not exist on the mainland. The question now is whether Hong Kong will be allowed to take the next step towards democracy and to choose its own chief executive, without the candidates being pre-screened by Beijing.An intelligent response from the Communist party would allow Hong Kong to act as a testbed for democratic reforms. The formula of one country, two systems – allied with the territory’s wealth and sophistication – is perfectly designed to allow Hong Kong to proceed with democratic reforms without triggering immediate demands for similar changes on the mainland. A successful and democratic Hong Kong might then serve as a model for the gradual introduction of similar reforms at a local and city level in the rest of China.Unfortunately, the central government in Beijing seems determined to take the opposite path. It cannot risk allowing democracy to flourish within China’s borders. It cannot allow the express wishes of the party to be flouted. By taking this decision, China has set itself on the path of confrontation with the demonstrators. If they do not drift away, the risk of violent intervention by China obviously rises.It did not – and does not – have to be this way. For some years after the handover in 1997, it looked as if China was handling Hong Kong with impressive tact and sophistication. The press stayed free; the courts stayed independent. Beijing even allows a moving commemoration of Tiananmen to take place every June 4. Four years ago Martin Lee, the veteran pro-democracy campaigner, told me that he had been “pleasantly surprised” by the extent to which China had allowed Hong Kong to preserve its freedoms. But earlier this year, when I met Mr Lee again, his views had changed completely. Now he warned that Beijing seemed intent on denying Hong Kong democracy and eroding the independence of the courts.What has changed? Perhaps the Communist party in Beijing has become more assertive and less tolerant. Perhaps it was never willing to risk real democracy emerging in Hong Kong.&amp;lt;div class="storyvideonojs"&amp;gt;&amp;lt;div&amp;gt;&amp;lt;p&amp;gt;You need JavaScript active on your browser in order to see this video.&amp;lt;/p&amp;gt;&amp;lt;img alt="No video" src="http://im.ft-static.com/m/img/logo/no_video.gif" /&amp;gt;&amp;lt;/div&amp;gt;&amp;lt;/div&amp;gt;

Over the next few days, the world’s eyes will be on the streets of Hong Kong. But the public’s reaction in mainland China will also be crucial. The development that Beijing must fear most is the spread of pro-democracy demonstrations to the mainland.Beijing is trying to block news from Hong Kong on the official Chinese media and on the internet. If the demonstrations continue, it may also try to exploit a latent antagonism between mainlanders and Hong Kong citizens. In Hong Kong, mainlanders are sometimes portrayed as uncouth interlopers. In China, Hong Kongers are sometimes portrayed as spoiled brats with an unpatriotic nostalgia for colonial rule.The idea that Hong Kong citizens are less than truly Chinese is something that the nationalist press in China may exploit if the protests escalate. In that, the official reaction to Hong Kong could be reminiscent of Russia’s reaction to demonstrations in Ukraine. The Ukrainians and Hong Kongers are embraced as brothers, in Moscow and Beijing, as long as they stay in line. But if they err, they can quickly be denounced as tools of western imperialism.The difference, of course, is that Hong Kong is part of China’s sovereign territory whereas Ukraine is now an independent country. However, a violent denouement to the demonstrations in Hong Kong will disrupt relations between China and the west, almost as surely as the annexation of Crimea destroyed business as usual between Russia and the west. The government in Beijing is now pondering its next move. In the interests of Hong Kong, China, the global economy and international political stability, it is crucial it gets it right.

Macroprudential regulation is not likely to prevent asset bubbles. But credit allocation will depress growth.

By Paul H. Kupiec

Sept. 28, 2014 7:01 p.m. ET

Stanley Fischer, vice chairman of the Federal Reserve, has been tapped to head the Fed's new financial stability committee. In recent speeches both Mr. Fischer and Fed Chair Janet Yellen have argued that so-called macroprudential regulation can prevent asset bubbles from erupting while the Fed maintains near-zero interest rates. There is not much evidence that these policies prevent financial bubbles. But there is great risk in allowing a small group of unelected technocrats to determine the allocation of credit in the U.S. economy.Macroprudential regulation, macro-pru for short, is the newest regulatory fad. It refers to policies that raise and lower regulatory requirements for financial institutions in an attempt to control their lending to prevent financial bubbles. These policies will not succeed. Consider the most common macroprudential tool: raising or lowering bank minimum capital standards. Academic research—including a recent study I co-authored with Yan Lee of the Federal Deposit Insurance Corp. and Claire Rosenfeld of the College of William and Mary—has found that increasing a bank's minimum capital requirements by 1% will decrease bank lending growth by about six one-hundredths of a percent. Other studies have examined the effect on loan growth of raising a bank's minimum capital requirements by 1%, using data from different countries and different measurement techniques. They have found a similarly minor effect—between seven and 13 basis points. The economic magnitude is trivial. Banks adjust their lending in response to a host of factors including pressure from bank regulators, changes in their funding cost, losses on their outstanding loans and other factors. Changes in regulatory capital and liquidity requirements have only the weakest detectable effects on lending.

Stanley Fischer Reuters

There is also the very real risk that macroprudential regulators will misjudge the market. Banks must cover their costs to stay in business, and in the end bank customers will pay the cost banks incur to comply with regulatory adjustments, regardless of their merit. By the way, when was the last time regulators correctly saw a coming crisis?Other common macroprudential tools include varying maximum loan-to-value ratios and debt-to-income limits. Yet in a speech on July 10 Mr. Fischer noted that changing minimum capital requirements and maximum loan-to-value ratios on mortgage loans in Israel had little effect on attenuating a mortgage-lending boom that raised central bank stability concerns beginning in 2010. When short-term interest rates are low and long-term rates are high, borrowers prefer to use short-term or floating-rate debt to minimize interest payments. And so it was in Israel when a surge in mortgage-lending growth was fueled by mortgages keyed to low short-term interest rates. When higher capital requirements and lower loan-to-value limits did not work, the Bank of Israel reduced the growth in mortgage lending by requiring banks to tie mortgage rates to long-term interest rates, effectively prohibiting cheap variable-rate mortgages. With Mr. Fischer now heading the Fed's new financial stability committee, might we soon see regulations requiring product-specific minimum interest rates? Or maybe rules that single out new loan products and set maximum loan maturities and debt-to-income limits to stop banks from lending on activities the Fed decides are too "risky"? None of these worries is an unimaginable stretch. Since the 2008 financial crisis, U.S. bank regulators have put in place new supervisory rules that limit banks' ability to make specific types of loans in the so-called leverage-lending market—loans to lower-rated corporations—and for home mortgages. Since there is no scientific means to definitively identify bubbles before they break, the list of specific lending activities that could be construed as "potentially systemic" is only limited by the imagination of financial regulators. Few if any centrally planned economies have provided their citizens with a standard of living equal to the standard achieved in market economies. Unfortunately the financial crisis has shaken belief in the benefits of allowing markets to work. Instead we seem to have adopted a blind faith in the risk-management and credit-allocation skills of a few central bank officials. Government regulators are no better than private investors at predicting which individual investments are justified and which are folly. The cost of macroprudential regulation in the name of financial stability is almost certainly even slower economic growth than the anemic recovery has so far yielded. Mr. Kupiec, a resident scholar at the American Enterprise Institute, has held senior positions at the Federal Deposit Insurance Corp., International Monetary Fund and Federal Reserve Board.

A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday.

The 16th annual Geneva Report, commissioned by the International Centre for Monetary and Banking Studies and written by a panel of senior economists including three former senior central bankers, predicts interest rates across the world will have to stay low for a “very, very long” time to enable households, companies and governments to service their debts and avoid another crash.

One of the Geneva Report’s main contributions is to document the continued rise of debt at a time when most talk is about how the global economy is deleveraging, reducing the burden of debts.

Although the burden of financial sector debt has fallen, particularly in the US, and household debts have stopped rising as a share of income in advanced economies, the report documents the continued rapid rise of public sector debt in rich countries and private debt in emerging markets, especially China.

It warns of a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”. The total burden of world debt, private and public, has risen from 160 per cent of national income in 2001 to almost 200 per cent after the crisis struck in 2009 and 215 per cent in 2013.

“Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said.

Luigi Buttiglione, one of the report’s authors and head of global strategy at hedge fund Brevan Howard, said: “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”

The report’s authors expect interest rates to stay lower than market expectations because the rise in debt means that borrowers would be unable to withstand faster rate rises. To prevent an even more rapid build-up in debt if borrowing costs are low, the authors further expect authorities around the world to use more direct measures to curb borrowing.

The report expresses most concern about economies where debts are high and growth has slowed persistently – such as the eurozone periphery in southern Europe and China, where growth rates have fallen from double digits to 7.5 per cent. Although the authors note that the value of assets has tended to rise alongside the growth of debt, so balance sheets do not look particularly stretched, they worry that asset prices might be subject to a vicious circle in “the next leg of the global leverage crisis” where a reversal of asset prices forces a credit squeeze, putting downward pressure on asset prices.

Half a century ago, a classic essay in The New Yorker titled “Our Invisible Poor” took on the then-prevalent myth that America was an affluent society with only a few “pockets of poverty.”

For many, the facts about poverty came as a revelation, and Dwight Macdonald’s article arguably did more than any other piece of advocacy to prepare the ground for Lyndon Johnson’s War on Poverty.

I don’t think the poor are invisible today, even though you sometimes hear assertions that they aren’t really living in poverty — hey, some of them have Xboxes! Instead, these days it’s the rich who are invisible.

But wait — isn’t half our TV programming devoted to breathless portrayal of the real or imagined lifestyles of the rich and fatuous? Yes, but that’s celebrity culture, and it doesn’t mean that the public has a good sense either of who the rich are or of how much money they make. In fact, most Americans have no idea just how unequal our society has become.

The latest piece of evidence to that effect is a survey asking people in various countries how much they thought top executives of major companies make relative to unskilled workers. In the United States the median respondent believed that chief executives make about 30 times as much as their employees, which was roughly true in the 1960s — but since then the gap has soared, so that today chief executives earn something like 300 times as much as ordinary workers.

So Americans have no idea how much the Masters of the Universe are paid, a finding very much in line with evidence that Americans vastly underestimate the concentration of wealth at the top.

Is this just a reflection of the innumeracy of hoi polloi? No — the supposedly well informed often seem comparably out of touch. Until the Occupy movement turned the “1 percent” into a catchphrase, it was all too common to hear prominent pundits and politicians speak about inequality as if it were mainly about college graduates versus the less educated, or the top fifth of the population versus the bottom 80 percent.

And even the 1 percent is too broad a category; the really big gains have gone to an even tinier elite. For example, recent estimates indicate not only that the wealth of the top percent has surged relative to everyone else — rising from 25 percent of total wealth in 1973 to 40 percent now — but that the great bulk of that rise has taken place among the top 0.1 percent, the richest one-thousandth of Americans.

So how can people be unaware of this development, or at least unaware of its scale? The main answer, I’d suggest, is that the truly rich are so removed from ordinary people’s lives that we never see what they have. We may notice, and feel aggrieved about, college kids driving luxury cars; but we don’t see private equity managers commuting by helicopter to their immense mansions in the Hamptons. The commanding heights of our economy are invisible because they’re lost in the clouds.

The exceptions are celebrities, who live their lives in public. And defenses of extreme inequality almost always invoke the examples of movie and sports stars. But celebrities make up only a tiny fraction of the wealthy, and even the biggest stars earn far less than the financial barons who really dominate the upper strata. For example, according to Forbes, Robert Downey Jr. is the highest-paid actor in America, making $75 million last year. According to the same publication, in 2013 the top 25 hedge fund managers took home, on average, almost a billion dollars each.

Does the invisibility of the very rich matter? Politically, it matters a lot. Pundits sometimes wonder why American voters don’t care more about inequality; part of the answer is that they don’t realize how extreme it is. And defenders of the superrich take advantage of that ignorance. When the Heritage Foundation tells us that the top 10 percent of filers are cruelly burdened, because they pay 68 percent of income taxes, it’s hoping that you won’t notice that word “income” — other taxes, such as the payroll tax, are far less progressive. But it’s also hoping you don’t know that the top 10 percent receive almost half of all income and own 75 percent of the nation’s wealth, which makes their burden seem a lot less disproportionate.

Most Americans say, if asked, that inequality is too high and something should be done about it — there is overwhelming support for higher minimum wages, and a majority favors higher taxes at the top. But at least so far confronting extreme inequality hasn’t been an election-winning issue. Maybe that would be true even if Americans knew the facts about our new Gilded Age. But we don’t know that. Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.

The GLD ETF should be last on your list of long term investment opportunities.

I think it is time for another dose of reality for both those who have been severely battered in the metals market over the last 3+ years, as well as those who have followed our analysis at Elliottwavetrader.net, and have significantly profited during that same time.While the sentiment of late has been shown to be quite bearish in the metals market, I still do not believe that a final low has yet been seen. But, since we have a set up in place to take us to those final lows within the next 2 months - assuming we maintain below the resistance levels I have cited in my shorter term analysis on my weekly Seeking Alpha articles, as well as the more detailed charts we provide at Elliottwavetrader.net, I think we can see even more extreme sentiment in metals before our final lows are met.So, now the question on the table for most investors is what do we do now? Well, my answer is still to maintain some patience. I am relatively confident of the fact that we will see lows in gold below the 2013 lows, which will set up long term buying opportunities you will not see again for many years to come.

Where Should You NOT Put Your Money For Gold?

When you invest in precious metals, you have to consider your goals and objectives. Many view metals as insurance against government or financial system collapse. Others view it as a capital investment within their larger portfolios. But, no matter how you view the metals, there is one very important factor you must consider no matter for what purpose you choose to invest in precious metals. And that is assurance of maintaining the value of your investment, which is apart from the market risks one accepts when entering into any investment.When deciding upon your investment vehicle, you have many choices. One can invest in metal bars, metal coins, collectible metal coins, metal ETF's, or even options on metal ETF's. While there are benefits and draw backs to each of these vehicles, the purpose of this article is to highlight the serious dangers involved if your long term investment vehicle of choice is a metal ETF.You probably may not know that I am an attorney by training, so I was able to read through the prospectus and identify certain troublesome sections with that legal document. While I clearly cannot offer a legal treatise on the pitfalls inherent in these vehicles. I am hoping to at least give you a taste as to how toxic these funds are and should not be seriously considered as long term investment vehicles.First, let's look at the Risk Factor section of the GLD prospectus. Specifically, the first section I would like to highlight states:"Neither the Trustee nor the Custodian independently confirms the fineness of the gold allocated to the Trust in connection with the creation of a Basket [issuances]."The prospectus goes on further to state:"In issuing Baskets, the Trustee relies on certain information received from the Custodian which is subject to confirmation after the Trustee has relied on the information. If such information turns out to be incorrect, Baskets may be issued in exchange for an amount of gold which is more or less than the amount of gold which is required to be deposited with the Trust."These two sections should be alarming to anyone who actually takes their investments seriously. These are basically disclaimers by the Trustee regarding the quality or even the amount of the gold being held in trust for the ETF. Furthermore, it does not seem as though the Trustee has a specific obligation to confirm the gold deposited in the trust actually exists. Rather, the Trustee is permitted to rely upon information given to it. Again, please note that there is no absolute legal requirement which I have seen incumbent upon the Trustee to ensure that there is sufficient gold in the Trust as represented by the amount of shares sold in the ETF. To make matters even more tenuous for holders of shares in the GLD, the prospectus further provides that:"In addition, the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust's gold"."In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust's gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian."So, not only does the Trustee have no obligation to ensure that there is sufficient gold within the Trust, even if it wanted to do so, it's ability is further limited by the contractual relationship it has entered into with its Custodian within the Custody Agreement. Furthermore, if there is a subcustodian holding gold for the Trust, the Trustee has no right to ensure the existence and accuracy of the gold reported and being held by such subcustodian. This truly blew my mind when I read this. Forget about even requiring an audit, which it clearly does not, the trustee cannot even step onto the premises of a subcustodian or even review the records of the subcustodian.So, let's move on to the next major issue with the GLD. The prospectus clearly states that "The Trust does not insure its gold." Yes, you read that right. The trust does not insure its gold. It goes on further to state that:"If the Trust's gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust's claim."So, the prospectus is clearly warning you that there is no entity nor is there any insurance backing potential risks of loss to the physical gold on hand.And, yes, folks, it can get worse. There are further counter-party risks that make this investment vehicle even less appealing to own as an investment:"Gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold account will not be segregated from the Custodian's assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian's insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust's allocated gold account."So, if a custodian or subcustodian becomes insolvent, and since the gold they hold is not likely specifically designated for the GLD trust account, all the gold they possess will be used to satisfy all the debts of that custodian, and not just the debt owed to the GLD trust account.So this now brings me to the discussion of what happens in the event of default of the custodian or the ETF entity itself.In the event of a default of the trust in which the gold is held, one becomes an unsecured creditor of the trust. That means that the trust will likely be required to liquidate its positions in the metals, and satisfy the unsecured obligations of the trust, usually at pennies on the dollar. None of the gold being held in trust within the GLD is designated to each holder of shares on an individual basis. Therefore, all the owners of the GLD have equal rights to all the gold being held in trust. So, if there is not sufficient gold to satisfy all rights to that collective gold, all the owners are subject to a pro-rata reduction in their ownership interest in the total gold being actually held and on hand.When you invest in gold, don't you want to assure yourself of having an asset which retains some amount of value? However, when you place your money into these ETF's, not only is one not protected in the manner in which they initially expected when investing in metals - as they have no ownership of actual gold - but one now is even in a worse off position since the amount of money they invested may only be returned to them at pennies on the dollar in the event of a default.It is quite unfortunate that most of those that buy shares of the GLD believe that they have an ownership in a gold investment vehicle, which is assumed to be a safe alternative to actually owning gold itself. While I have not even delved into all the issues I have identified in the prospectus, I seriously hope that this has at least brought to light that this is far from the truth. Personally, I only view GLD and SLV as trading vehicles and would never have more than 1-3% of the total amount I have designated for investment into metals placed into these tenuous vehicles.

This week, the price of gold was basically unchanged from the previous week.

Other precious metals -- silver and platinum -- moved lower on the week.

Bulls and bears continue to debate the future path of the yellow metal.

Short term, gold's path of least resistance is likely lower.

Last week in my article, Gold: A Follow Up - The Prospect for 4-Year Lows, I expressed the view that it is only a matter of time until the price of gold tests crucial support at $1185. A bearish view of gold certainly has stoked a healthy and heated debate on the topic of the future price direction of the yellow metal. This past week saw the price of gold virtually unchanged. Gold attempted to move higher when the US and coalition forces began bombing raids in Syria last Monday night. Gold managed a meager rally to $1237 where selling emerged. Short-term resistance remains at the $1241.70 level. The price of silver dropped another 20-30 cents over the course of last week. Silver fell through key support of $18.185 (the June 24, 2013 low) on September 19 and has continued moving lower since. Platinum moved sharply lower, falling almost $40 on the week, and palladium fell almost $30. Therefore, gold continues to get more expensive relative to its precious cousins, even though the gold price is deteriorating as well.As a precious metals trader for some of the most high-profile bullion trading houses since 1983, gold holds a special place in my heart. I have seen gold trade from a low of $255 an ounce in January 2001 to a high of $1920.7 in July 2011. I have watched the daily action in gold during bull markets, bear markets and static markets. From 1983 through 2002, gold never traded below $255 or above $502. I have spoken and traded with Central Bankers around the world that hold the metal as a foreign exchange reserve. I have seen producers come and go. I have seen investors come and go, and I have developed a very special connection to gold and view the precious metal as an asset like no other.I believe that every portfolio should contain a certain percentage of precious metals. As we have seen over the past decade, gold can cushion an investment portfolio during times of crisis. I further believe that it is appropriate to adjust the percentage of gold or precious metals held according to market conditions. We are at an interesting and perhaps critical juncture with respect to the direction of the gold price as it approaches a key support level. There are many mixed signals out there and the market seems to be vacillating, frustrating both bulls and the bears. Let us look at both cases in order to try to understand what the gold market may have in store for us during the coming weeks and months.The Bullish CaseFiat currencies are not "real" moneyGold bulls have argued for a long time that fiat currencies have little intrinsic value. These currencies, the US dollar, yen, euro and others have only the full faith and credit of the countries that print them supporting their value. Central Bank policy of printing more and more currency, which some argue, will lead to an eventual inflationary spiral discredit the paper money. The current move higher in the US dollar is occurring because dollars are the best choice in a foreign exchange environment loaded with only poor choices. Moreover, throughout history, gold is the only means of exchange that has survived thousands of years and gold is real money.China is a massive buyer that waits in the wingsThere are two components to Chinese buying. First, the Chinese government holds a very small percentage of their foreign exchange reserves in gold relative to other countries in the world. Therefore, the Chinese government plans to increase these reserves. China has recently become the largest gold producer in the world, producing 420 tons in 2013, more than 15% of world production. It is likely that much of that production will serve to increase governmental reserves with occasional purchases adding to the mix. Second, Chinese citizens will continue to purchase gold particularly while the Chinese currency, the yuan, remains non-convertible. Lower gold prices will spur physical buying in China.Gold has corrected lower and is oversoldGold has moved 36% lower from the highs to an oversold condition on daily, weekly, monthly and quarterly charts. A technical rally is overdue in the gold market and recent selling has seen tepid volume. Not only is gold in an oversold condition, but gold mining stocks are also putting in bottoming formations.Festival season in India will reinvigorate physical demandThere is certain seasonality to the price of gold, and festival and wedding season in India tends to bring buying to the market. Signs of Indian buying are clear, as premiums for physical bullion in India have moved higher over the past week.Production costs are above current pricesSome argue gold is now falling below production cost and in the case of some producers and mining projects, this is true. Higher gold prices have caused aggressive mining concerns to explore for and mine higher cost production. Mines in South Africa have become deeper over recent years; the deeper the mine, the more expensive production becomes.The Bearish CaseStrong US DollarSince June 30, 2014, the dollar has rallied 7.3%. Priced and traded in US dollars, gold traditionally has an inverse relationship with the greenback. The current trend in the dollar is negative for the price of gold.Prospect for higher US interest ratesThe US economy has been showing signs of strength, which has prompted some Federal Reserve members to favor raising interest rates in the future. The prospect for higher US interest rates increases the cost of carry for all commodities, including gold.Weak precious metals pricesSilver has shed 18.5% of its value since early July. Platinum is down 14.5% during the same period, while gold has only depreciated by 9.5%. Clearly, recent action in precious metals markets has been bearish. The key question for the future is, given recent price moves and relative values, is gold expensive relative to silver and platinum, or are the industrial precious metals too cheap at current levels?Technical weakness

Open interest in COMEX gold futures has dropped from 417,000 contracts in July to 388,000 contracts, a decrease of almost 7%. Interest in gold ETF products has been tepid. An oversold condition in gold has been in place for over a month, but the yellow metal continues to move lower. The relative strength index on daily charts has remained below the 30 level, with slow stochastics also below 30. Momentum and sentiment in gold remains negative, according to technical indicators.No rally in the face of military actionLast week's failure of gold to react on news of military actions in Syria and Iraq is another example of gold's inability to appreciate on geopolitical tensions at its current price level. The weak rally up to $1237 failed and the gold price actually closed close to the lows at $1222 that day. Gold proceeded to trade down to $1206.60 later in the week, making a new low for 2014. Gold opened on January 2 at $1207 and did not trade below that level during the year until last week.No evidence of a big short positionThe low level of open interest in gold futures (the total number of open long and short positions) provides evidence that there are no large long or short positions in the gold market at present. A move lower will likely encourage trend, following systems to short the gold futures market, which would set the stage for lower prices, at least initially.A conclusion...I am not on the fence here, I believe gold will eventually test and break the $1185 support. There is too little interest in the market to support a rally now. Right now, the overall pressure on commodity prices, a stronger dollar, the prospect for rising interest rates and weakness in other precious metals will most likely overwhelm the bulls in the near future.However, it is possible that the price of gold continues to trade in a sleepy range, frustrating bulls and bears alike. Gold has always represented value and it always will. Gold's value dates back many thousands of years; its luster has intoxicated humanity for virtually all of history. That illusive value is set each day in the international gold market at prices where buyers and sellers meet. Whether bullish or bearish, we should never forget that the daily price of gold is the right price for the commodity. The world has changed in the new millennium and the role of gold has gained resurgence in popularity. Discussions about gold often reveal deep convictions about politics and economics. Gold is a symbol of value and its price can be a consensus indication of the perception and faith in political and economic systems. I have no doubt that lower prices will increase physical demand for gold. Lower prices will eventually set the stage for another leg in what will be a continuation of the long-term bull market in gold. Bulls and bears each have strong and compelling arguments, it is possible, maybe even probable, they will both be correct over time. Currently all evidence for the short term is that the path of least resistance in gold continues to be lower.

Saving Steadily Is Far More Important Than High Earnings or Investment Wizardry

By Jonathan Clements

Sept. 27, 2014 8:09 p.m. ET

Others look at old photographs and chuckle at the person they used to be. I feel that way when I look back at the columns I wrote before leaving The Wall Street Journal in 2008.

It isn't that my financial beliefs changed much during the six years I worked at Citigroup, C in Your ValueYour ChangeShort positionbefore returning to journalism this April. But today, some ideas loom far larger.

Wealth is born of great savings habits. While at Citi, I often spoke at client dinners. Those attending were wealthy—but they sure didn't seem that way. That reinforced the impression I already had from corresponding with Journal readers. Those who amass seven-figure portfolios don't necessarily have huge incomes and often aren't talented investors.

Instead, they invariably fit the mold of "The Millionaire Next Door"—the archetype made famous by the best-selling book: They're the couple who live in a modest home and take pride in driving their car until the odometer breaks. By clamping down on living costs, they can save great gobs of money, and that's easily the biggest contributor to their financial success.

What about all the other stuff that personal-finance columnists write about, like cutting investment costs, buying index funds and managing taxes? Sure, those things help, but they pale in importance compared with good savings habits.

Looking to save more? According to the Bureau of Labor Statistics, a hefty 51% of household spending is devoted to just two items: housing and transportation.

But if your home and car are devouring a big chunk of your income, you'll find it tough to save. Want to lower your living costs? You might buy a less expensive home, pay off the mortgage and keep your cars for longer.

As an added bonus, low living costs can mean less stress and greater financial freedom. If you lose your job, want to change to a less-lucrative career or get hit with unexpected expenses, you know you can get by on relatively little.

It's OK to stray. In the 1990s, I advocated building stock portfolios using index funds that looked like the broad market. That meant focusing almost exclusively on two funds: a total U.S. market fund, like Fidelity Spartan Total Market Index Fund and Vanguard Total Stock Market Index Fund, and a total-international fund, such asYour ValueYour ChangeShort positionand Vanguard Total International Stock Index Fund.

I still think these funds make a great core holding. But I have become more willing to stray from the market's weightings by adding other index funds that—fingers crossed—might improve a portfolio's diversification and bolster returns through rebalancing. The latter involves setting target portfolio percentages for different funds and then regularly bringing your mix back into line with these targets.

In particular, I have become a fan of index funds that focus on beaten-down value stocks, emerging markets, international small-cap stocks, gold-mining shares, and U.S. and foreign real-estate investment trusts. While I think funds like these can enhance a portfolio, they clearly introduce an added risk: With an investment mix that looks less like the global market, there's a greater chance you'll lag behind the broad market indexes in any given year.

Glorious returns mean lean times ahead. In the six years since I last wrote a regular column, we had an economic meltdown and a grudging recovery, accompanied by a stock-market meltdown and an exuberant recovery.

Buyers of 10-year Treasurys can't expect to earn more than today's 2.5% yield, which isn't much above inflation. Meanwhile, the Shiller P/E—a variation on the standard share price-to-earnings ratio that uses inflation-adjusted corporate profits from the past 10 years—stands at 26, versus a 50-year average of less than 20. That doesn't mean financial markets will implode, but it does suggest future returns will be modest.

One obvious response: Save more. You should aim to max out your retirement accounts, especially an employer's plan that offers a matching contribution. But for additional savings, consider focusing on other goals, like paying down debt or buying that first home. Indeed, real estate strikes me as an intriguing purchase. Mortgage rates are modest, while home prices remain roughly 17% below their 2006 peak, as measured by S&P/Case-Shiller's 20-City and 10-City Composites.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.